Oil and gas producer California Resources Corp.
has shed about $4.4 billion in debt after trading it for equity during a Chapter 11 financial reorganization, the company announced late last month.What’s more is that the massive balance sheet restructure took less than three months to complete.“It’s difficult to be proud of a bankruptcy,” the company’s new Chief Financial Officer Francisco Leon told the Business Journal. “But we did it in 88 days. That’s a pretty big accomplishment.”The Santa Clarita firm, one of the state’s largest oil producers, filed for Chapter 11 in July hoping to alleviate about $5 billion in debt that was set to mature next year. The company announced its emergence from the reorganization Oct. 27.Balance sheetAccording to a press statement from the company, “approximately $4.4 billion of loans and notes outstanding as of June 30, 2020 have been equitized. Additionally, all of the company’s previously existing equity interests have been canceled and ceased to exist after the market close on Oct. 27, 2020.”In the statement, Chief Executive Todd Stevens said the company’s balance sheet is much stronger and the restructured organization is better equipped to withstand oil price cycles.“You can expect CRC to build upon the fundamental strengths of our business that provide us a high degree of operating flexibility, including our low-decline conventional oil production, low capital intensity, exposure to the Brent crude oil markets, substantial mineral ownership in fee and integrated infrastructure,” he said.California Resources emerges with more than $345 million in available liquidity. It has entered a new revolving credit facility with a $1.2 billion borrowing base and $540 million commitment that will mature in 2024. The company’s capital structure includes a $200 million second lien term loan and $300 million of secured notes due to creditor Ares Management in 2027.
Ares, in Los Angeles, was formerly CRC’s joint venture partner on the Elk Hills power plant and cryogenic gas plant near Bakersfield. CRC gained full ownership of those assets as part of the Chapter 11 negotiations.Sullivan & Cromwell, headquartered in New York and with an office in Los Angeles, served as lead counsel to CRC through the reorganization.
Jim Bromley, co-head of the firm’s restructuring practice, said in a statement: “We focused early on the need to acquire full ownership of CRC’s critical midstream assets and minimize the time in Chapter 11, despite the size and complexity of the capital structure. It was a prime example of how aggressive upfront planning can drive consensus and eliminate the extra cost and risks prevailing in too many other oil and gas bankruptcies.”As for leadership, CRC has repositioned some executives including Leon, formerly executive vice president of corporate development and strategic planning, who has been with the company since before it split off from Occidental Petroleum, now headquartered in Houston.
Leon replaces Marshall Smith, who left in August. The company said in a statement Smith’s departure did not result from a difference of opinion or disagreement.It has also appointed a new board of directors.California Resources’ profitability relies on oil prices, which plummeted since the pandemic started and at one point went negative. A dramatic drop in the valuation of Benchmark Brent crude oil left the company unable to make interest payments on its debt – the last straw that forced the company to file for protection. Prices have since bounced back, but aren’t where they were before the pandemic. Brent crude has hovered around $40 a barrel for the last few months.Leon said the reorganization means California Resources’ breakeven price is a bit lower than the $50 a barrel measurement the company previously used.
He declined to specify what the breakeven price is now, but said the new balance sheet includes hedges that will protect the company if oil tanks again.
“We’re going to have up to 75 percent of our oil production hedged. That really takes away the downside exposure of the business,” he said.
The company filed its quarterly earnings report with the Securities and Exchange Commission Nov. 5, after press time.Stock volatilityShares of California Resources resumed trading on the New York Stock Exchange Oct. 28 under the ticker CRC. More than 83 million new shares were issued at a debut price of $19.95 – a price based on the agreed-upon value of the company according to stakeholders.
The stock has been volatile since relisting, closing at $15 after the first day of trading and dropping to $12.64 on Nov. 4.Leon explained the company extended a rights offering to its new equity holders, allowing them to buy shares at a healthy discount. As a result, the stock is dealing with a high concentration of shares held by very few people.“What has happened is debt holders who now own the company, in order for them to recover some of their investments, they’re going to try to sell the stock. That’s why we’re seeing volatility. … We have to re-establish our strategy, go out and talk to new investors and get new interest in our stock so non-owners come in and buy stock. That will ultimately increase the floor price of shares.”Leon said there is a long road ahead before California Resources – or any oil provider for that matter – is once again able to capture pre-pandemic profits.
“It’s hard to see a material improvement in oil prices heading into 2021. Oil and gas is a very capital intensive business,” he said, noting that the release of a vaccine would be a huge boon to business. “If you don’t drill new wells, production slowly deteriorates. What’s happening in the sector worldwide is we’re going to have a period – a year or more – of underinvestment. That eventually catches up to you.”He said California Resources has halted drilling during its bankruptcy proceedings, and will restart drilling activity next year with a focus on bringing existing wells back online and using workover rigs to access deeper layers inaccessible to traditional rigs.
“They’re more profitable. It’s the first place to start.”He added the company is researching what it would take to build a carbon capture and sequestration plant at the Elk Hills Field near Bakersfield, which he described as California Resources’ “crown jewel.”Such a plant would trap carbon dioxide emissions from the company’s Elk Hills power plant and inject the gas more than a mile deep into an artificial storage reservoir beneath the caprock layer.The practice of carbon capture is used heavily by Texas oil providers, including Occidental Petroleum.
Leon said California Resources hasn’t committed to any such activity yet, but is discussing what it would take to stand up a plant. For now, local industry groups are just glad to see CRC back in business.Rock Zierman, Chief Executive of the nonprofit California Independent Petroleum Association in Sacramento, told the Business Journal CRC’s emergence from Chapter 11 is good for Californians and the local economy in that the company will continue to “provide clean and affordable energy under the planet’s strictest regulations, employ a diverse workforce, invest in new technologies to lower the carbon footprint of energy production, and pay much-needed tax revenue to support public programs.”
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